Monday, October 22, 2018

Many Individual Stock Returns Are In Correction Territory

On a price only basis the S&P 500 Index remains up 3.08% year to date and up 4.66% on a total return basis. As the following chart does show, the S&P is off its late September high by 6.54%.

Below the surface though more widespread weakness has already taken place. The below chart separates the S&P 500 holdings by decile based on the percent return each company is below its 52-week high price. Only the top three deciles have an average return off the high less than negative 10%. The other seven deciles have average returns below highs worse than negative 10%. In other words, 350 stocks in the S&P 500 Index or 69% are in correction territory. Of these 350 stocks, 176 companies, or 34%, are in bear market territory.

Certainly important market technical levels are being tested at the moment; however, a great deal of widespread weakness has already occurred with companies. And if this mid-term election year plays out like past mid-term years, the market historically has generated most of its mid-term gains in the last two months of the year.

Source: LPL Research

Friday, October 19, 2018

Fall 2018 Investor Letter: A Midterm Election Year

There are many indicators pointing to continued strength in the U.S. economy including increased manufacturing activity, robust readings from the service sector and low unemployment levels last seen 49 years ago. Employee wages are rising, and the labor market is benefiting from the current growth in the economy. We view the low levels of unemployment and continued wage growth as a positive signal for the economy.

As we discuss in the Fall 2018 Investor Letter, history shows the fourth quarter of a midterm election year combined with the first quarter of the following year are the two strongest returning quarters for the market over the four-year presidential cycle. The start of the fourth quarter may lead investors to believe something other than the historical data though. Days into the quarter, markets have turned lower and volatility has increased to a more normal level. Although this is unsettling, the underlying economic and market fundamentals are still supportive of favorable equity returns looking ahead. As the above chart shows, the performance of the S&P 500 occurs late in a mid term year.

For additional insight into our views for the market and economy as the year nears and end, see our Investor Letter accessible at the below link.

Wednesday, October 17, 2018

Hiring Pace Continues To Lag Job Openings Growth

If job openings are an indication of the economy's strength, yesterday's Job Openings and Labor Turnover (JOLTs) report is confirmation of economic strength. Job openings reached another record high of 7.136 million. Compared to last August's openings of 6.044 million, openings are up 18.1% on a year over year basis.

The timing of the unemployment data is one month ahead of the JOLTs data, however, the number of unemployed looking for work is 1.172 million lower than job openings. This is hard evidence that labor is a scare resource at the moment. This is not the type of data output that occurs in a recessionary environment. 

Friday, October 12, 2018

Pullbacks, Fear And Opportunity

From early 2016 to early 2018 the S&P 500 Index moved higher with very little downside volatility. As the below chart shows, that stretch of time was an abnormally long one in terms of very little downside market move. One consequence of this low volatility period is many investors' began to believe the equity market does not go down. In reality, a low volatility market is not normal though. Having the market pullback between 5-10% once or twice a year should be expected by equity investors. The current decline from peak to current level is only 6.9%.

Thursday, October 11, 2018

Large Decline In Bullish Sentiment

Today's Sentiment Survey release by the American Association of Individual Investors reported a  15.1 percentage point decline in bullish sentiment. Of course this report comes one day after the 800+ drop in the Dow Jones Industrial Average Index. Two-thirds of the decline moved to the bearish camp with the other one-third moving to the neutral category. When all is said and done, the three categories of sentiment, bullish, neutral and bearish, fall in the 30-35% range.

Tuesday, October 09, 2018

A Favorable Small Business Environment

The NFIB Small Business Optimism Index for the month of September was reported at 107.9 and just slightly missed consensus expectations of 108.0 for the month. Also, the Index declined .9 points from the recording setting 108.8 reported in August. However, the September reading represents the third highest reading recorded in the 45-year history of the Small Business Optimism Index. In short small businesses remain optimistic about their operating environment.

Sunday, October 07, 2018

Equity Put/Call Ratio Approaching Overly Bearish Level

Not too long ago the concern around interest rates was the fact the yield curve was flattening and the Fed's rate hikes might end up inverting the interest rate curve by pushing short rates above long term rates. This past week though the focus seems to have shifted to a quickly rising long term 10-Year U.S. Treasury rate and a resulting steepening of the yield curve.

Friday, October 05, 2018

Increasing Bullish Equity Sentiment And Declining Bond Prices

As of Wednesday's market close, the S&P 500 Index is up 11% on a year to date basis, while most bond strategies have struggled to breakeven at best. Longer term bonds have been the most challenged as evidenced in the below chart. The iShares 20+ year Treasury Bond ETF (TLT) is down 7.7% year to date. Through Wednesday's close, the 30-year U.S. Treasury is down 11.1% year to date. Of course, as interest rates rise, longer term bonds tend to be the least favorable bond investment as prices move inversely to the move in bond yields.

Thursday, October 04, 2018

Inverted Yield Curve: Could This Time Be Different?

In our recent article, “Respect The Predictive Power Of An Inverted Yield Curve”, a colleague noted that investors ignore this highly reliable indicator at their own peril. Today, I will argue for why investors should perhaps ignore this highly reliable indicator because “it may be different this time”.

To be clear, it may not be different this time, but it is always worth considering both sides of an argument.

Wednesday, October 03, 2018

Small Caps And Cyclical Stock Sectors Underperforming

During the early part of this year quite a bit was written about the outperformance of small cap stocks versus large cap stocks. One commonly referenced reason for the outperformance was based on the trade and tariff issues and the potentially greater negative impact this would have on large cap stocks. It does seem though the trade issues are slowly being resolved and this headwind subsiding for markets broadly and for the large cap stocks in particular. As a potential consequence, the small cap outperformance has completely unwound and large cap stocks, as measured by the S&P 500 Index, are outperforming small caps as seen in the chart below.